With all the talk of inflation and economic recovery, we see an indicator that is telling the opposite story. Before getting into this, perhaps we should define what the Velocity of Money (VoM) is. According to [Investopedia](https://www.investopedia.com/terms/v/velocity.asp): >The velocity of money is a measurement of the rate at which money is exchanged in an economy. It is the number of times that money moves from one entity to another. It also refers to how much a unit of currency is used in a given period of time. Simply put, it's the rate at which consumers and businesses in an economy collectively spend money. >The velocity of money is usually measured as a ratio of gross domestic product (GDP) to a country's M1 or M2 money supply. It is a pretty straight-forward situation. There is, however, a lot of information contained in this indicator. To start, it is the entire premise behind the belief that money printing leads to inflation. This outdated notion believes that if money is printed (expansion of the money supply) we will see "too much money chasing too few goods and services", resulting in an increase in pricing. This will lead to overall GDP growth as everything moves up. Of course, in the United States, along with the rest of the world, we had more than 30 years of deficit spending, yet notice something about the **Velocity of Money**. It has slowed down. In fact, the VoM peaked around 1997 and headed down since then. Here is what the chart looks like: ![fredgraph 2.png](https://images.hive.blog/DQmW8zzCD9Q3DwBCS1sZQjdNNQFf6rNk9jCEzxa3HjATECC/fredgraph%20(2).png) As we can see, this dropped off a cliff since the Great Recession. In spite of the recovering economy, the VoM continued to decline. Once COVID-19 hit, the already declining pace fell off to record lows. Since that time, we saw a massive expansion in the M2 money supply. Surely, according the the economic theory, this would set things in motion. Here is the M2 Money Supply: ![fredgraph 4.png](https://images.hive.blog/DQmYrH4M3o6HUt95rFSziMX2VddU7weEer5CJdvQPT4xpLA/fredgraph%20(4).png) Notice how it exploded since the economy was shut down due to COVID. The Fed took its easing to an entirely new level. Yet when we look closely, we see the VoM has slowed even more. ![fredgraph 3.png](https://images.hive.blog/DQmTz1mzK41U9DgaCsN4YxGk9rWnM3wcpfD9e3AooG82pkL/fredgraph%20(3).png) After registering a 1.121 at the end of Q1, we now see a 1.120. Anyone who follows what is taking place, ignoring the mainstream financial media, knew that another bad reading was going to take place. How can this be? After all, with all this money printing, there ought to be a FOMO unleashed on the economy. IF there is so much money out there, everything ought to be gobbled up at insane prices. The reason this occurs is, outside the supply chain disruption that interrupted almost all industries, the money isn't going anywhere. A large portion of the money supply is locked up. The Fed is actually working backwards. They are creating the opposite effect than they are seeking. This is the price you pay for listening to economists living in an eco-chamber spewing the same nonsense back and forth to each other. The combined entrepreneur experience of the 600 economists at the Fed: zero days. Hence we are dealing with an academic exercise. Theory is not translating into the real world. It is a situation that existed for over a decade and is only getting worse. In short, quantitative easing does not ease at all. Instead, **quantitative easing actually tightens financial conditions**. This process actually contracts things, not expands them. How can that be? Every college level economics class teaches the exact opposite. What makes this possible? The Velocity of Money is what tells the story. For all the easing and other forms of stimulus that took place over the years, including massive amounts of deficit spending, we see a VoM that is declining. This is an outcome all those eggheads never considered. Of course, there is also a very simple reason: look at where much of the easing ends up. ![fredgraph 5.png](https://images.hive.blog/DQmbbNJZ476pxtHAD7FSzsHCKddAPpjvc4oc5KhvyagqEWS/fredgraph%20(5).png) We won't go into the entire explanation of how reserve assets are created through the easing process. That is outside the scope of this article. The important thing to note is that these reserves are on the balance sheet of the depository institutions (commercial banks) yet they reside at the Fed. At the same time, the only entities that can hold these reserves are other depository institutions. This means the money cannot be used to pay salaries, rents, electric bills, or be lent out. It is basically locked up. As we can see from the above chart, the total amount in reserves is near $4 trillion. Since this can only be moved between member institutions, the *Velocity of Money** is near zero. In other words, the money does not go anywhere. It is for this reason that we see a situation where the banking system is sitting on too much cash. Since lending is contracting, the banks are bursting with funds. This is a problem for them since there are capital/balance sheet requirements. Too much money subjects them to penalties instilled after they tanked the economy during the Great Recession. This is also why we see a USD shortage in both the US and global economy. As more money is locked into the banking system, there is less available for economic activity. This is why we see continually lackluster economic performance. Another quarterly reading of a slowing **Velocity of Money**. This does not bode well for the economy going forward. But then again, the outcome of the Fed's policies are going to be a continued slowing of economic performance. ___ If you found this article informative, please give an upvote and rehive. https://images.hive.blog/0x0/https://files.peakd.com/file/peakd-hive/doze/MkkDNhyH-2020_04_13_16_57_48.gif gif by @doze ![screen_vision2025_1.png](https://images.hive.blog/DQmXEv6MvKTCurBzSdbKjWzFadJwfJfJfmA2We9EwD5q5Vb/screen_vision2025_1.png) logo by @st8z Posted Using [LeoFinance ^Beta](https://leofinance.io/@taskmaster4450le/velocity-of-money-down-again)

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